Eversource 2005 Annual Report Download - page 25

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In the fourth quarter of 2005, CL&P began construction of a new
substation in Killingly, Connecticut that will improve CL&P’s 345 kV
and 115 kV transmission systems in northeast Connecticut. The project
is expected to be completed by the end of 2006 at a cost of approximately
$32 million. At December 31, 2005, CL&P has capitalized $2.5 million
associated with this project.
During 2005, CL&P placed in service $175 million of electric transmission
projects, including $70 million related to the Bethel to Norwalk project.
Yankee Gas: In 2005, Yankee Gas’ capital expenditures totaled $74.6 million.
Yankee Gas is constructing a LNG storage and production facility in
Waterbury, Connecticut, which will be capable of storing the equivalent
of 1.2 billion cubic feet of natural gas. Construction of the facility began
in March of 2005 and is expected to be completed in time for the
2007/ 2008 heating season. The facility, which is expected to cost
$108 million, is approximately 48 percent complete. Yankee Gas has
capitalized $46.4 million related to this project at December 31, 2005.
The LNG project represented approximately 45 percent of Yankee Gas’
capital expenditures in 2005. In 2005, including AFUDC, Yankee Gas also
spent $17.7 million on its reliability improvement program, $13.8 million
on connecting new customers, and $10.1 million on other initiatives,
including meters and information technology systems. In 2006, Yankee
Gas projects total capital expenditures of approximately $100 million.
PSNH: In 2005, PSNH’s capital expenditures totaled $158.8 million,
including $131.9 million on PSNH’s electric distribution system and
generation. This $158.8 million includes $45 million related to the
conversion of a 50 MW coal-fired unit at Schiller Station in Portsmouth,
New Hampshire to burn wood (Northern Wood Power Project). The
Northern Wood Power Project began in late 2004 and is expected to
achieve commercial generation in the second half of 2006. The NHPUC’s
2004 approval of the project was appealed to the New Hampshire
Supreme Court by some of New Hampshire’s existing wood-fired
generating plant owners. The Supreme Court upheld the NHPUC’s
finding that the project is in the public interest and, as a result, the
project was able to proceed in accordance with the original schedule.
This project is approximately 90 percent complete and PSNH has
capitalized $64.7 million related to this project at December 31, 2005.
In 2005, PSNH also spent $26.9 million on upgrading and expanding its
electric transmission system. In 2006, PSNH projects total capital
expenditures of approximately $150 million.
WMECO: In 2005, WMECO’s capital expenditures totaled $44.7 million,
including $32.4 million in its electric distribution system and other capital
expenditures and $12.3 million on its electric transmission system. As
part of WMECO’s rate settlement approved by the DTE on December
29, 2004, WMECO agreed to invest not less than $24 million in capital
expenditures in 2005 and 2006 related to reliability improvements. In
2006, WMECO projects total capital expenditures of approximately
$50 million.
NU Enterprises: In March of 2005, HWP notified Massachusetts environmental
regulators that it planned to install a selective catalytic reduction system
at the 146 MW Mt. Tom coal-fired station in Holyoke, Massachusetts.
The system will significantly reduce nitrogen oxide emissions from the
unit and extend its operating life by meeting expected emission
requirements through 2010. The $14 million project commenced in
July of 2005 and is expected to be complete by mid-2006. At December 31,
2005, this project was approximately 75 percent complete and HWP
has capitalized $9.9 million related to this project.
Transmission Access and FERC Regulatory Changes
In January of 2005, the New England transmission owners approved
activation of the New England Regional Transmission Organization
(RTO) which occurred on February 1, 2005. CL&P, PSNH and WMECO
are now members of the New England RTO and provide regional open
access transmission service over their combined transmission system
under the ISO-NE Transmission, Markets and Services Tariff, FERC
Electric Tariff No. 3 and local open access transmission service under
the ISO-NE Transmission, Markets and Services Tariff, FERC Electric
No. 3, Schedule 21 – NU.
As a result of the RTO start-up on February 1, 2005, the ROE in the
local network service (LNS) tariff was increased to 12.8 percent. The
ROE being utilized in the calculation of the current regional network
service (RNS) rates is the sum of the 12.8 percent “base” ROE, plus
a50 basis point incentive adder for joining the RTO, or a total of 13.3
percent. An initial decision by a FERC administrative law judge (ALJ)
has set the base ROE at 10.72 percent as compared with the 12.8
percent requested by the New England RTO. One of the adjustments
made by the ALJ was to modify the underlying proxy group used to
determine the ROE, resulting in a reduction in the base ROE of
approximately 50 basis points. The ALJ deferred to the FERC for final
resolution on the 100 basis point incentive adder for new transmission
investments but reaffirmed the 50 basis point incentive for joining the
RTO. The New England transmission owners have challenged the
ALJ’s findings and recommendations through written exceptions filed
on June 27, 2005 and a final order from the FERC is expected in 2006.
The result of this order, if upheld by the FERC, would be an ROE for
LNS of 10.72 percent and an ROE for RNS of 11.22 percent. When
blended, the resulting “all in” ROE would be approximately 11.15 percent
for the NU transmission business. Management cannot at this time
predict what ROE will ultimately be established by the FERC in these
proceedings but for purposes of current earnings accruals and estimates,
the transmission business is assuming an ROE of 11.5 percent.
In November of 2005, the FERC announced that it was considering a
number of proposals to provide financial incentives for the construction
of high-voltage electric transmission in the United States. Those
proposals included reflecting in rate base 100 percent of the cost of
CWIP; accelerated recoveryof depreciation; imputing hypothetical
capital structures in ratemaking; establishing ROEs for transmission
owners that join RTOs; and other incentives that could improve the
earnings and/or cash flows associated with NU’stransmission capital
expenditures. Comments on the FERC proposals weresubmitted in
January of 2006, and final rules are expected by the summer of 2006.
Legislative Matters
Federal Energy Legislation: On August 8, 2005, President Bush signed into
law comprehensive energy legislation. Among provisions potentially
affecting NU are the repeal of PUHCA, FERC backstop siting authority
for transmission, transmission pricing and rate reform, renewable
production tax credits, and accelerated depreciation for certain new
electric and gas facilities. The renewable production tax credits provision
is expected to save PSNH approximately $3 million annually in federal
income taxes for the first 10 years after the Northern Wood Power
Project becomes operational. The accelerated depreciation provision,
assuming timely rate recovery, is expected to increase Utility Group
cash flows by morethan $5 million annually.As partof this legislation,
some but not all of the SEC’s responsibilities under PUHCA were
transferred to the FERC.